Brad Feld

Month: March 2006

I can’t seem to get away from the “what structure should I use to set up my business” questions.  Here’s another one that I recently got.

I am trying to help an entrepreneur set up a distributorship to take US made products (tools) to a large market in asia with a huge need. Start up costs are under $1 million (5-10 angels and insiders), with proceeds going to pay for initial inventory take downs, field sales and support, and minimal opex. We do not foresee a future liquidity event for return of capital but rather generation of cash consistent with a distributorship. Question: what is the best equity structure for this company?

Given my recent post on S-Corp’s vs. LLC’s I’d lean toward an S-Corp (assuming all the investors are US-based), but given the recent change in Section 265 of DCGL, I’d be very comfortable with an LLC.  In either case, avoid a C-Corp and the risk of double taxation given that the company will likely be paying out dividends to its shareholders.

I stumbled over a post on the re:invention Marketing blog (a toolbox for & about enterprising women) about BusinessWeek’s recent article on tech entrepreneurs under the age of 30.  Kirsten Osolind points out that of the 16 “cutting edge entrepreneurs under 30” that were highlighted, none were women (ok – two were women – Sandy Jan and Elaine Wherry – of Meebo.)  I forwarded this to Lucy Sanders, the CEO of National Center for Women & Information Technology – and she logically responded “well Brad – blog about it.”  Interestingly, the ratio (2:16 or 12.5%) is about the same ratio of high school girls to boys that take the AP Computer Science test.

The line of the day at a board meeting yesterday was from the VP Engineering concerning a customer deployment.  “The customer acknowledged the issue was on their side – it was a problem between the chair and the keyboard.”

Check Point and Sourcefire announced the cancellation of their deal on Thursday.  This was a very nice deal for Sourcefire and its investors, as Check Point was paying $225 million for the company.  Sourcefire had raised a total of about $33 million so the early investors, including Sierra Ventures, probably made about 15x, NEA which was a round 2 investor probably made about 10x, and Sequoia – which was a round 3 investor, probably made about 3x.

As I sit here pondering this on a Saturday morning, I’m baffled, appalled, and offended by our government’s actions in killing this deal.  I remember having similar reactions when the government was investigating the $5.5 billion acquisition of Verio (a Colorado-based ISP / hosting company) by NTT in 2000.  While I wasn’t an investor in Verio, I knew many of the people there, including several of the key investors, and couldn’t fathom why our government would get in the way of the deal. Thankfully, the Clinton administration finally greenlighted the deal and one of the huge pre-bubble crash Colorado deals got done – just in time.

I’m baffled because of the open source aspect of the situation. Sourcefire’s core products are built on top of Snort, which was created by Sourcefire’s founder Martin Roesch.  While Sourcefire has undoubtably created a significant amount of proprietary (i.e. non-open-source) code in their products, Snort is still an extremely popular and growing open source product and community.  Dear Mr. Government – this means that anyone – including the really bad nasties – can download Snort and take a look at it.  While they can’t take a look at Sourcefire’s products, as long as Sourcefire has any meaningful Snort-based code as part of their system, the thing you proport to be concerned about is irrelevant.

I’m appalled because it makes no sense to me that the US government would stand in the way of the acquisition of a US security software company by an Israeli software company.  Check Point is a well-known, publicly traded (on NASDAQ) and broadly deployed “international company” – they have a huge US presence, employ large numbers of US citizens, and – well – operate in the global software / IT marketplace.  Check Point was funded in the mid 1990’s by two prominent US VC firms – Venrock and USVP (in fact, Ray Rothrock of Venrock and Irwin Federman of USVP still sit on Check Point’s board.)  This type of protectionism is just gross to me and is potentially damaging to the venture business as foreign companies (such as those in Israel, China, and India) are natural buyers of many US-based startups, including those that have significant business with the US government.  If an Israeli-based company can’t buy a US-based security startup, why would the US government let a China-based company do this?  As a VC or an entrepreneur, if you take this out to it’s logical conclusion, you get unhappy really fast.

I’m offended because – as a jewish American and an investor in high tech companies – the notion that our government is willing to block the sale of an entrepreneurial company to an Israeli company because the Israeli company is a threat to US security makes me want to vomit.  This is the same government that recently decided to share civilian nuclear technology with India.  Now, I’m not tied up in the politics of it all, nor do I want to be, but when I step back and look at it from an entrepreneurial perspective, and think about all of the Israeli security technologies that have made their way into US products (and – in a number of cases – become meaningful US-based companies), I just feel like someone in Washington needs a major history lesson.

While Check Point and Sourcefire have put a good face on the situation, I’ve got to believe there are some very unhappy people in Maryland and on Sand Hill Road today.

My good friend Matt Blumberg (CEO of Return Path) and his lovely wife Mariquita (aka “NY Marathon 2005 Support Crew Co-Leader”) love to travel around the world.  Rather than subject us to long videos of their trip, they conveniently put their amazing photographs up on the web with extensive commentary.

Their most recent trip was to India.  This was Matt and Mariquita’s first trip there so the photos include an extensive history lesson.  It appears to be a little warmer than their trip in 2002 to Antarctica.

Beautiful stuff guys.  Welcome home.

Jason and I have mentioned accredited investors several times in various postings on this blog.  However, after I received the following question, I realized we had never talked about why non-accredited investors are an issue for a company.  The question I received follows:

Do you have any stories or insight into the dangers of non-accredited investors? I’m currently attempting to work out a messy deal where some of the original (and potentially very unhappy) investors come in all flavors – sophisticated and accredited, unsophisticated and accredited, sophisticated and unaccredited, and of course, unsophisticated and unaccredited.  I’d love to see a post on the subject in your blog, should you have the insight and interest.

For those of you that don’t know what an accredited investor is, the SEC provides a very clear definition.  In general, unaccredited investors can pose a number of problems.  You’ll have to ask your lawyer for the nitty gritty, but we’ll cover the three major points in this post. 

First, have you done a proper private placement?  One has to jump through many more hoops to sell securities to unaccredited investors.  Many times, what appears to have been done correctly, later turns out to have been done poorly or incorrectly.  This is particularly troubling because at any time, these unaccredited investors have the right to rescind their investment in the company.  This is a ticking time bomb that can explode, especially if the company is underperforming.  It’s a very dangerous thing to have investors around that can unravel a deal with 20/20 hindsight.  Let’s assume, however that your lawyers got it right, which leads us to the next issue.

What happens on an acquisition?  Regardless if the placement was done correctly to the unaccredited investors, an acquisition of the company could pose big problems.  Take the case where a private company acquires the company for stock.  Handling the unaccredited investors can be extremely difficult.  The unaccredited investors need a purchase representative to trade their stock for the acquiring company stock, or the stock needs to be registered or subject to fairness hearings.  Alternatively, the buyer will insist that they don’t want unaccredited investors holding stock in their company, in which case the seller needs to come up with cash to buy out the unaccredited investors. We’ve seen cases where the buyer completely refused to deal with the unaccredited investors and the accredited investors on the seller’s side had to invest new cash in the company to buy out the unaccredited investors.  Public company acquisitions can present similar problems if the stock being issued in the acquisition is not registered.  Basically, your garden variety mess.

Finally by nature, unaccredited investors are generally unsophisticated.  This might be the most concerning issue of having unaccredited investors into your company.  By nature, they are less experienced in these types of investments and have less money to invest than others.  What you normally get are more skittish investors whose emotions rise and fall with every piece of good or bad news from the company.  When things turn bad, “unsophisticated investors” – who often didn’t realize that they could lose 100% of their investor – become irrational or hostile, in an already difficult situation for the company (i.e. the company is failing.)

Now – just because an investor is accredited doesn’t mean he is sophisticated.  The basic message is always the same – know who your investors are and what their past behavior has been like, especially in difficult circumstances.  However, especially in early stage companies, try to insure that all of your investors are accredited and – if some aren’t – that your lawyer has done a proper private placement to eliminate any issues associated with the actual financing.

I do a lot of short phone calls and meetings.  I try to organize them around “random days” where I spend the majority of the day meeting and talking to people where I don’t have a specific agenda.  Often – they have a specific agenda (which is good).  However, many have no idea how to communicate their agenda – or what they want to accomplish – in either an efficient or effective manner.

I have my assistant schedule these calls for 30 minutes each.  Some take 5 minutes, which gives me time to do other stuff (email, other phone calls); some take 29 minutes.  I’ve learned over the years that there is rarely a reason for a meeting / call to go longer than 30 minutes unless there’s a clear pre-set agenda so – rather than struggle with bigger time windows, I simply stop after 30 minutes and – if it needs to go longer, figure out another time (this rarely happens.)  Interestingly, I’ve tried to get this down to 15 minutes and have not been able to get into a full day rhythm with this – there’s something magical about the 30 minute window (at least for me.)

I had a full day today – 10 scheduled calls, a lunch, and a bunch of random calls and email before I headed out to the airport.  As I was driving to the airport after an ineffective call (due to the lack of good cell coverage on E-470), I was pondering several of the calls I’d had earlier in the day.  One was good (where good is defined as useful to both parties); one was not so good (not so good = not useful to at least one of the parties involved.) 

My post lunch call was the good one.  I had an enjoyable lunch catching up with Jonathan Weber of New West Network and was running a few minutes late.  At 1pm, I got a call and told the person that I was scheduled to talk to that I was running a few minutes late, I apologized, and asked if it would be ok if I called him back at 1:15.  As I was dialing him at 1:15, I noticed that he had just emailed me a WebEx invite.  I clicked on it as he was answering and joined the meeting.  I apologized again for running late, told him I had until 1:30, and suggested we get right into it.  We hadn’t ever talked before and had been introduced a week earlier by a mutual friend.  He reminded me who introduced us, told me he could do the presentation in five minutes, and we could spend the balance talking.  He then told me his goals for the call (simple and well articulated) and dove into the presentation.  He was true to his word and around 1:21 (yes – I looked) we talked about what he’d presented to me.  I asked a few questions and gave him what I hope was useful and encouraging feedback.  At 1:29, he told me that he appreciated the time and would be in touch.  I hung up impressed, interested, and knew I’d be responsive if he ever asks for anything.  I was also appreciative that he was gracious about me being late – I was the one that caused the time to be extra-compressed, yet he was still able to accomplish his goal.

I churned through some additional stuff and then had the not so good call later in the afternoon.  Again, my assistant had scheduled it for 30 minutes, which the other party knew.  I hopped on the conference call at the appointed time.  As with the earlier call, I had been introduced to these folks by a friend (a different one), although I was less clear on what they were up to since it had been a few weeks and I couldn’t quickly look up their web site (they didn’t seem to have one yet – at least not an obvious one.)  We spent a few wasted minutes on pleasantries and then one of them started talking.  After five minutes of listening to a high level description about something that I didn’t understand that had something to do with the company they were working on which was as yet undefined, I interrupted and asked him what his goal for the call was.  After an unnecessarily long explanation, I determined that they were approaching me as a potential investor.  I then asked him to try to be more direct about what his business did, what stage they were at, what they had accomplished, and what big opportunity they were going after.  I listened – with a few questions – for another 10 minutes and still didn’t really understand what they were trying to do.  I decided to change my approach and understand how far along they were.  It became clear that they were very early, had a big vision, but were working hard to get a demonstration system up while looking for short term money (e.g. “within the next 30 days”) to fund them through the creation of the demo.  By the time we got here, 25 minutes had passed.  I communicated that while the general thing they were talking about was something I could become interested in (e.g. it was a software company, not an China-based manufacturer of drill bits), I wasn’t interested in trying to get more engaged at this point based on (a) their geography (I really only want to do very early stage stuff that is close to home), (b) my lack of understanding of what they were going after (e.g. they didn’t “get me” in the first meeting), and (c) their timetable (I wasn’t interested enough to engage at a level now where I could help with a financing in the next 30 days.)  I did offer to reconnect when their demo was ready, take a look, and try to understand better what they were up to.  We then spent the next five minutes in the awkward dance where they were trying to find something to “get me really excited” while I was trying to politely end the call, having made my decision that I didn’t want to spend any more time on this now.  We eventually untangled ourselves and said polite goodbyes.  Hopefully they’ll drop me a note when they have a demo and we’ll take another shot.

Now – the not so good phone call wasn’t “horrible”, it just wasn’t effective.  I don’t mind the couple of minutes of chit chat at the beginning, but it’s real time being wasted for no particular reason.  Since we don’t yet have a relationship, we’re not “catching up” on anything.  I’m often on the receiving end of the request for time, so this becomes the other person’s first impression time with me.  Why waste it with idle banter?  Instead, use the first 60 seconds to get my attention, remind me how we got connected, and tell me what you want to accomplish with the call.  We could have then gotten – in 5 minutes – to the same place we got in 25 minutes. It’s the same at the end of the call – let’s wrap it up, figure out what the proverbial “next steps” are, and get on with it.

Amy and I give each other gifts on the first day of the month.  My all time personal favorite gift that Amy gave me was a Remote Control Fart Machine.  This month, I’m giving her a painting from Emilio Lobato, one of our favorite artists, which I just picked up from the William Havu Gallery in Denver.


This 60” x 60” beaut is titled Vestido en Soledad which – according to Google Translate Spanish to English – means “Dress in Solitude.”  If you’ve ever been to my office or my house, you’ll see plenty of Lobato’s hanging around.  Of course, one of my favorite things about his paintings is that he makes me think of Emilio Lizardo from The Adventures of Buckaroo Banzai.  Happy April 1st Amy.

The Treadputer

Mar 21, 2006

I’ve got a goal of running a marathon in every state by the time I turn 50.  I’ve done 6 and I’m 40, so I’ve got a lot of running in front of me.  A few months ago, I told Ross that I wanted to integrate a computer workstation into a treadmill so that I would work while I ran.  Part of my training regimen involves walking at a decent pace (3.3 miles / hour) so I want to be able to spend board / conference call time on the Treadputer rather than sitting at my desk or laying on my couch.


We’ve had the Treadputer operational for about 45 days and I love it.  I had high expectations for walking, but low expectations for running.  It turns out that the Treadputer is highly functional when I’m running, which enables me to do some of my longer runs during the day while I’m on a call rather than having to get up at 5am to get them in before the day starts.

Part of my goal was to have a fully functional workstation that was equivalent to the one on my desk.  I’ve used a three monitor setup for the better part of a year (and a two monitor setup for several years before that), so I needed plenty of horsepower.  Following is the base system:

  • IBM ThinkCenter 3.2GHz PC
  • 3 Video cards (ATI Radeons)
  • 3 19″ NEC Monitors

  • A 6 monitor mounting system (we only use 3)

  • Bluetooth stereo audio headphones

  • Desk microphone

  • USB Headset (for voice calls)

  • Logitech 2.1 speakers

  • Kensington Trackball

As you can see from the picture, this is tightly integrated with my Vision Fitness T9450HRT treadmill.  The software is mostly standard stuff build around Microsoft Windows XP Professional and Microsoft Office, with a few exceptions to handle speech and phone.

  • Dragon Naturally Speaking (for voice recognition)

  • Cisco IP Communicator (for IP Softphone)

  • Skype (for other calls)

When we first assembled the Treadputer, Ross was skeptical that I would be able to read the screen while walking and assumed that reading while running would be impossible. While the three monitor setup helps a lot, it was surprisingly easy to read while walking or running.  We’re running all three monitors at their standard 1280×1024 resolution and haven’t juiced up the font sizes. 

While we thought reading would be difficult, typing seemed like it was going to be a real challenge.  We started with a shelf built into the treadmill for the keyboard to sit on.  After about five minutes, it was clear that the keyboard needed two controls – both height and tilt.  To be really usable, especially while running or walking fast, the keyboard needs to be tilted up at a 45 degree angle and be able to be lifted and lowered to suit the person on the treadmill.  All I’ve got at this point is a sweat soaked prototype (build out of a cardboard box) – Ross promises me that a real version is coming soon.

Oh – and the mouse was useless.  It’s impossible to control a mouse while walking or running.  A big stationary trackball (also tilted up at a 45 degree angle) solved this problem nicely.

I’ve always been fascinated with voice recognition – one of the earliest things I ever did on an Apple II was work with the Scott Instruments VET-2 (“voice entry terminal”) which did very rudimentary voice recognition (but was state of the art back in 1982.)  I doubted that Dragon Naturally Speaking would work while I was running, but it performs almost flawlessly after thirty minutes of training.  I’m still finding my way around it – although it does remind me (by not recognizing anything) to slow down my running pace if I’m breathing too hard.

Finally, I wanted the phone system to be simple and easy to deal with for several hours at a time.  It turns out that the Cisco IP Softphone is trivial to configure (I occasionally use it on my laptop when I’m on the road and I need to make IP calls) and with a headset works great.  Since I usually close my door to spare my office mates from the noise (and smell) I make while running, we are trying to get a free standing audio mike to work, although currently it sounds like I’m in the bottom of a tunnel talking into a tin can in a windstorm.

If you wander by my office and see me puffing away, or if you have the misfortune of being on a call while I’m panting, at least you’ll know what the cause is.